Life Insurance Advice – who needs it?

You take out life cover. You die. Your family receives a lump sum payment. Pretty basic really. So, who really needs life insurance advice? Well, it may not be as simple as you think…

Life insurance is pretty straightforward, isn’t it? For all practical intents and purposes, it’s a commodity in which price is the key factor. You die, your family receives a lump sum payment. Pretty basic really. That’s exactly what I thought when I first took out life cover after the birth of my first child 12 years ago.

I didn’t seek life insurance advice… I asked the broker for the cheapest cover, filed the policy in our important documents folder and thought little about it. Many people I speak to today think the same as I did. BUT having worked in this financial advice industry for over 10 years I now know it actually isn’t quite that simple. On the contrary, it is a potential minefield in which many things can go wrong… and this is where a good insurance adviser is worth their weight in gold.

Take the following scenario:

24 hours from now you’re dead!… It starts with a vague headache during your lunch break at the office. By the time you leave work, that ‘vague’ headache has become what feels like someone is hammering the inside of your skull – with a jack-hammer… You get home and take yourself off to bed. ¥ou lie down and drift into sleep… but you don’t wake up… ever!

This is a pretty unpleasant thought, but stay with me for a bit… If this were to happen to you tonight, how would your family cope financially? Would they be able to pay for your funeral or the ongoing household bills? How long would they be able to go on living in the house. Oh, by the way you also run a small business. Could your business survive without you long enough to find a buyer? Or would it have to be put into voluntary liquidation or worse still receivership?

No problem, you say. The $500,000 life insurance cover you bought over the phone 5 years ago would pay out, the mortgage would be paid off, your business partner would continue to run the business until a buyer could be found and your family wouldn’t have to worry about money for the next 10 years, at least…

Let’s just stop here for a bit and check some of these assumptions. How can you be sure that the insurance will pay out? And if it does, will it go to the parties who need it, when they need it? And will it cover everything you need it to?

On reading that last paragraph, did you experience just a slight sense of unease? Some nagging feeling that, perhaps you need to check the details of the life cover you have in place today?

In this article, I am going to explore some not uncommon problems which can arise when taking a DIY approach to life insurance… and which suggest you should at least consider seeking life insurance advice from a professional.

Let’s take a look at each of the questions we raised above:

Question 1 – how can you be sure the insurance will pay out?

Life insurance is pretty straightforward. You die, the insurance pays out.

In our example, you bought your insurance over the phone, quite possibly via a telemarketing service one evening while you were trying to cook dinner for the family. One of the primary reasons you bought the policy was because it was quick, cheap and didn’t require you to fill out a whole ton of forms including medical declaration.

Warning bells should be sounding here… this sounds like accidental death cover only. If that is the case, your aneurism wouldn’t have been covered and the insurer wouldn’t pay out on the policy.

This is just one example of where a policy may not payout. Here are a couple of others assuming you do have full cover:

– When you took out the cover you forgot to mention that you had recently seen the GP about a series of what seemed to be migraines which you had experienced some years before. Or what about that head injury when you were 14? If that comes to light in the follow up inquiries by your insurer on your medical history, they potentially have an option to void the policy.

– You changed your address, forgot to notify your insurer and the credit card details held by your insurer expired 18 months ago. They were unable to contact you for updated and your policy was cancelled without you being aware of it.

Question 2. Will it go to the parties who need it?

The effectiveness of your life insurance policy very much depends on ownership and your estate planning provisions.

If we assume that the policy does pay out. Let’s take a look at three factors which could affect where that payout goes:

– After you took out the policy, it was reassigned to your bank to pay off your mortgage. Whilst any surplus funds will eventually make it into your estate, control over how those funds are applied is lost. You may, for example, have wanted to use the funds for purposes other than mortgage… or your debt situation could have changed so that the payout on your policy doesn’t actually cover your current mortgage and, the funds would have been applied differently by your executors.

– You don’t have a current will. Actually, you thought your will was current except… you got married AFTER you created the will. As a result your will may invalid.

– This is your second marriage and whilst your will provides for all of your estate to your current wife, it is successully challenged by your estranged children from your first marriage and a proportion of the estate including the life insurance proceeds are awarded to those children.

– Using the second marriage example, your policy is actually owned by your estranged wife. Any proceeds from the policy would therefore rest with her.

Question 3. When they need it?

If you own the policy in your own name, the proceeds from the policy will be paid directly into your estate.

Let’s now look at a couple of timing issues which can arise in relation to the timing of a policy payout…

– Ownership is really, really important here. If you own the policy in your own name, the proceeds from the policy will be paid directly into your estate. No problem – that’s what you wanted to happen. Isn’t it? We’ll sort of. A prudent executor may choose wait the statutory six months (the time limit of liability) before the estate is distributed in accordance with the provisions in your will or, if you die intestate, to your legislated next of kin…..

– Let’s assume, for our purposes that, you do, in fact, wake up the next day, and although your headache has eased slightly, it hasn’t gone away 5 days later. So you take yourself off to the GP who refers you to a specialist. After a series of tests, you are called into the specialist clinic to be told the worst. You have a brain tumor….he gives you 6 months…12 months at the outside… wouldn’t it be good if your life policy was to pay out now… you could take that round the world trip you’ve been promising yourself for the last 10 years…..or use some of he proceeds to help your grown up children into their own home..or better still maybe pay for a new treatment programme which could help extend your life by a few more months…..many life policies have a provision for early payout (or partial payout) in the event of a diagnosis such as this… but many don’t. Does yours?

Question 4. Will it cover everything you need it to?

When was the last time your checked your life insurance cover…..will it cover everything you need it to?

Ok. Lets assume everything else stacks up. BUT – The cover was taken out 5 years ago. At that stage, you had a $250,000 mortgage. You had assumed at the time that the additional $250,000 would be more than enough for your wife and son – a reasonable assumption – AT THE TIME. However, in the intervening period, you have had two more children and moved house to a more expensive suburb taking on an additional $200,000 in debt. The situation today is that after paying off the mortgage, your family will have a relatively small surplus of $50,000. With two pre-school kids, your $500,000 life cover is starting to look a little light.

Key takeaways

Hopefully, we’ve got you thinking… about how important it is to make sure the life insurance you have in place will work as you need it to when you need it to – at claim time. To summarise:

1. Understanding the options and variables which could influence the effectiveness of a life insurance policy is critical. If you are unsure whether the life insurance you have in place will work when it’s needed in the way you want it to work, you should seek advice…..and seek that advice sooner, rather than later.

2. Even if you have effective insurance and estate planning provisions in place today…..their effectiveness can change over time…key life events such as marriage (or a breakdown) or the birth of a child should be times to take stock of your life insurance needs and provisions. At the very least you should review your insurance and estate planning provisions every 2-3 years to make sure they will work in the way you want them to when they are needed.

3. The best way to ensure that your life insurance programme will deliver is to seek insurance advice from a professional. Our adviser directory contains details of advisers who can help you and if you need help selecting an adviser check out our article on choosing an insurance adviser.

IMPORTANT PLEASE READ: This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult a Financial Adviser, please use our “find an adviser” database.

Get Social

CFPCM and are registered certification marks and CERTIFIED FINANCIAL PLANNERCM is a common law certification mark owned outside the U.S by Financial Planning Standards Board Ltd. Financial Advice New Zealand is the marks licensing authority for the CFP Marks in New Zealand, through agreement with FPSB.

CLUCM and are registered certification marks owned by Financial Advice New Zealand Inc for use in financial services sector in New Zealand.